How Sahara's Subrata Roy was smoked out by RBI-Sebi

The Supreme Court order of 31 August 2012 on Sahara had the potential to flutter the dovecots of the netherworld of Indian finance and embarrass the rich and famous no end.

But that it failed to do so for nearly 2 years is in itself a commentary on the smug belief of Subrata Roy, the beleaguered promoter of the Sahara group who finally got arrested this morning, that the nemesis would never catch up with him. He must have strongly believed that his fierce sense of loyalty to his ‘investors’ would eventually bail him out.

Subrata Roy. AFP

For the uninitiated, the Supreme Court’s order had called upon Sahara group companies Sahara Housing Investment Corporation Ltd and Sahara Real Estate Corporation Ltd (the two companies) to return about Rs 25,000 crore mobilised through optional fully convertible debentures (OFCDs). The amount includes an interest of 15 percent per annum, which was the coupon rate of these bonds.

The Apex Court order directed it to handover the money to the market regulator SEBI so that it could in turn return the money to a mindboggling 2.96 crore investors. It has handed over only the first tranche of Rs 5,120 crore and defaulted in giving back the remaining amount which is why it is facing contempt proceedings before the Supreme Court with Subrata Roy in the hot seat and facing arrest.

The market gossip always was Sahara was a money laundering company in an era where know your customer (KYC) norms were non-existent. One believed that black money was parked with Sahara which took upon itself the odious and risky job of showing them as being deposited by thousands of depositors most of whom were ghosts ie non-existent persons or benamis.

When the RBI sought to call Sahara’s bluff by asking it to stop its para banking activities, it converted these deposits into OFCDs, little anticipating that this time around it would be the turn of another government regulator, the SEBI, to pounce upon it. The market watchdog rightly pointed out that the two companies unlisted as they were couldn’t simply make a public issue.

The SEBI demolished Sahara’s counter argument that this was a private placement pointing out that roping in more than 50 investors to an issue robbed it of the private placement character.

Sahara, in other words, was smoked out by the RBI-SEBI pincer with the Supreme Court sustaining the initiative to the hilt. The three legal authorities seem to have done an encore of what used to happen under the preemptive purchase of immovable properties scheme by the income tax department until the year 2001 when the scheme was unceremoniously and quietly called off.

The scheme, while it lasted, worked beautifully in smoking out black money. The game plan was simple if stealthy. Anyone wanting to sell his immovable properties in major cities and towns had to notify the income tax department of his intention to do so along with the consideration agreed upon.

If the department suspected huge role of black money in the transaction, it acquired the property quietly by handing over a cheque to the seller who simply couldn’t demur given the fact that he had no grouse when the money he was asking for was being paid. It shouldn’t matter to him who paid him the amount. But to crooks it did matter. They lost the black money part of the deal. The ostensible reason given for discontinuation of this arguably best preemptive scheme ever against black money was that the department was stuck with rising stock of immovable properties in a falling market. Touché!

The cognoscenti has for long been bemoaning the demise of such a simple but brilliant scheme that made crooks stew in their own juice but the RBI-SEBI-Supreme Court trio seem to have done their bit to warm the cockles of the financial moralists.

One does not know what really happened to the efforts made by the SEBI in league with KRAs (know your client registration agencies) to find out whether the investors in OFCDs were ghosts or real persons with credible documents to prove their identities.

Presumably, bulk of them turned out to be ghosts. Sahara, obviously, couldn’t return the money to ghosts, could it? That is why it is squirming uncomfortably and coming out with gimmicks like sending truckloads of documents to the SEBI in its vain attempt to prove that much before the apex court cracked the whip, it had refunded upwards of Rs 20,000 crore in cash or kind.

It seems Sahara’s game is up. Will it be the turn of Roy to bite the bullet like Ramalinga Raju of Satyam infamy, and plead mea culpa? Raju took the rap on himself and didn’t expose his alleged political patrons. Would Roy too stoically take the rap on himself and protect his investors? If he does so, his investors would lose huge sums of money handed over to him in the manner of a trusting buyer of property who paid black money to the seller in the hope that the income tax department would not bestir to make the preemptive purchase.

Indeed Roy would not make any stunning disclosures because it would simply lack credibility in the face of imminent and vehement denial by the real investors, many of whom are believed to be the rich and famous of the country to whom taking the resultant financial loss in their stride would any day be more acceptable than being branded crooks.

The cognoscenti and yours sincerely have always bemoaned the lack of credible and effective benami prevention law in the country. But the SEBI’s initiative—in the wake of the YES Bank scam in which one Roopalben Panchal blithely applied in 6315 different names in an era when the KYC norms were non-existent at worst or complied with in breach at best—seems to be paying off.

The doughty lady did so to wangle as many shares as possible reserved for small investors. Sahara seems to have resorted to ghosts to protect crooks. Alas, the ghosts seem to have come home to roost.